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Slide in Oil Means Tighter (P)GCC Budgets

Persian Gulf Arabs are gradually losing perks from free water to cheap fuel as governments hit by the slump in crude prices seek to trim their budgets, Bloomberg reported.

Kuwait, Oman and Abu Dhabi reduced subsidies on diesel, natural gas and utilities this month. The plunge on oil markets has added to pressure on the region’s rulers to implement spending cuts that were under discussion before the drop. Countries in the six-member (Persian) Gulf Cooperation Council have used subsidies to mollify citizens and keep unrest at bay.

Spending on subsidies in the (P)GCC surged in the past four decades to reach as much as 10 percent of economic output in Saudi Arabia, the world’s biggest oil exporter, according to the World Bank. Cheap energy has led to a surge in consumption, which risks reducing the oil available for export. State-run Saudi Arabian Oil Co. warned in May that it will have “unacceptably low levels” of oil to sell in the next two decades if domestic power use keeps rising at 8 percent a year.

“With energy demand in the (P)GCC doubling every seven years, these countries can no longer afford to keep subsidizing domestic consumption of their chief export,” said Jim Krane, author of “Dubai: City of Gold” and a research fellow at Rice University’s Baker Institute for Public Policy in Houston. “Governments have genuine fiscal pressure that adds punch to their call for everyone to tighten their belts.” The Middle East and North Africa accounted for about 50 percent of global energy subsidies in 2011, according to the International Monetary Fund, a year when Brent crude averaged $111 a barrel. It was trading at below $47 on Wednesday. Even if oil recovers to average $65 a barrel this year, the (P)GCC nations will post a combined budget deficit of 6 percent of gross domestic product, according to Arqaam Capital, a Dubai-based investment bank.

Perfect Occasion

This is the perfect occasion really for policy makers to remove the subsidies as oil prices are down. Abu Dhabi, the richest member of the United Arab Emirates which sits on about 6 percent of the world’s proven oil reserves, raised electricity prices starting Jan. 1 to curb consumption, and ordered nationals to pay for water for the first time. Subsidies are becoming unsustainable as the cost of extracting fossil fuels rises, UAE Energy Minister Suhail Al Mazrouei said.

Lifting fuel subsidies is “just a matter of time,” he said Tuesday in Abu Dhabi.

Oman doubled natural gas prices for businesses starting this month, prompting a slide on the PGCC member’s stock market. Kuwait removed subsidies on diesel and kerosene, though it said the price of power and gasoline won’t increase for now.